1 Big Red Flag for Chipotle Mexican Grill Longs

Chipotle Mexican Grill’s (CMG) status as a cult stock has been tarnished and it may be a while before the company can repair the brand’s image. Ever since the E. coli scare, I have been bearish on Chipotle Mexican Grill and had a $400 price target.

In my opinion, the $400 mark was an important psychological barrier, and now with the stock having breached that mark, I am quite confident that Chipotle Mexican Grill will be trading at under $350 soon. Technical factors aren’t the only reasons why I think Chipotle Mexican Grill is heading lower.

There are many other reasons that could push Chipotle Mexican Grill towards the $350 or even $300 mark in the near future, thereby opening up a great buying opportunity for long-term investors.

Money wasted on buybacks

Chipotle Mexican Grill has spent hundreds of millions of dollars on buying back shares over the last few quarters. The buyback has helped Chipotle Mexican Grill sustain its overvaluation. However, this will not last long and the stock will dip further once the buybacks end.

I think the company has made an error by buying back shares. Chipotle Mexican Grill is in a downtrend and the company’s management made a mistake by buying back shares at higher levels. Not a smart move.

Monthly comps

Up until the last quarter, Chipotle Mexican Grill was reporting comps on the monthly basis. The company’s management promised to be as transparent as they can amid the whole incident. However, Chipotle Mexican Grill has not reported monthly comps since March, which is suspicious to say the least.

Further adding fuel to the fire, Chipotle Mexican Grill’s CEO Steve Ells sold millions of dollars’ worth of shares last month. The combination of both the factors is a very big red flag for Chipotle Mexican Grill longs.

The only reason why Chipotle Mexican Grill stopped reporting the numbers that I could think of is that the company’s initiatives of offering discounts hasn’t really worked, and its comps are worse than they were in March.

Conclusion

Chipotle Mexican Grill, at a P-E ratio of over 35, is a very risky stock to buy. I am suspicious about the company’s comps over the last few months. The chances of the company reporting a bad earnings report and pushing the stock lower next month are really high. As a result, I would suggest investors to sell the stock and wait for a better entry point.